A key buzzword in the financial world for a while now has been impact, as in impact investing, the idea that you can make investments in companies, organizations, and funds with the intention to generate a positive, measurable social or environmental effect alongside financial return. The biggest issue in impact investing has been the assumption that those financial returns will be lower.

No longer. Many startup companies are having a real, lasting, positive effect on the world, from MedTech companies using scanning technology that reverses spinal injuries to IoT sensors deployed in AgTech to conserve water and increase crop yields. The potential is only beginning to be realized.

With the private markets increasingly a place that sophisticated investors look to for outsize returns (albeit with outsize risk), investors may be able to satisfy their desire for impact without giving up return. That’s a pretty exciting prospect. Let’s look at it in detail.

Angel investors dream of finding and investing early in the next Uber, Airbnb, Waze, or Mobileye. While it’s easy to get seduced by the hype, serial startup investors know it is hard to be successful in this asset class. With the help of members of OurCrowd’s experienced investment team and other industry resources, we have put together a quick, three-part guide to ‘earning your wings’. These articles highlight essential terms and strategies while referencing accepted industry best practices; with these basics in hand, getting started in startup investing can be a lot smoother.

Part 3: Strategy

Diversify

One of the most important rules of investing is diversification. The more companies you invest in, the greater chance there is at least one “winner” in your portfolio to give you the return you’re looking for. In angel investing, you could focus on diversifying based on company industry, and business stage. Some experts say that 10-15 companies is the minimum sweet spot for building a strong portfolio, while the Monte Carlo Simulation suggests that 25 investments provides the optimal return. Read more on the topic in our previous article, Risk and Reward: the Truth about Diversification.

Angel investors dream of finding and investing early in the next Uber, Airbnb, Waze, or Mobileye. While it’s easy to get seduced by the hype, serial startup investors know it is hard to be successful in this asset class. With the help of members of OurCrowd’s experienced investment team and other industry resources, we have put together a quick, three-part guide to ‘earning your wings’. These articles highlight essential terms and strategies while referencing accepted industry best practices; with these basics in hand, getting started in startup investing can be a lot smoother.

Part 2: Risky Business

Understand the Risk

The distribution of returns within a VC portfolio typically follows the power law curve. According to Horsley Bridge, if you take a longtime limited partner in VC funds who has been collecting data on VC returns since 1983, you’ll find that just 6% of their hundreds of investments have generated 60% of their total returns since 1985. Professor William Sahlman of Harvard Business School is quoted saying, “80% of a VC Fund’s returns are generated by 20% of its investments.” The Angel Resource Institute published an Angel Returns Study in 2016 which reported that 10% of all exits generated 85% of all cash. They also reported that the failure rate (exits at less than 1X) of startups in their study climbed to 70% (from 52%). Forbes claims that 90% of new businesses fail, with 50% failing within the first four years, according to the U.S. Bureau of Labor Statistics.

Angel investors dream of finding and investing early in the next Uber, Airbnb, Waze, or Mobileye. While it’s easy to get seduced by the hype, serial startup investors know it is hard to be successful in this asset class. With the help of members of OurCrowd’s experienced investment team and other industry resources, we have put together a quick, three-part guide to ‘earning your wings’. These articles highlight essential terms and strategies while referencing accepted industry best practices; with these basics in hand, getting started in startup investing can be a lot smoother.

Part I: The Basics

Do Your Homework, Be Highly Selective

A 2007 study on angel investors’ returns found that those who spent more than the median time of 20 hours performing due diligence had an overall portfolio return of 5.9X, while those that spent less than the median only had returns of 1.1X (source).

OurCrowd’s investment team (made up of around 20 investment analysts, principals, advisors, and partners) vets more than 200 startups a month. After analyzing a company’s team, technology, business model, market size, traction, and legal integrity, OurCrowd offers a term sheet or joins an existing round. Historically, we have chosen to invest in less than 1% of the deal flow we’ve seen in our pipeline. Here’s a visualization of OurCrowd’s Startup Vetting Process.

Master the Term Sheet

The devil is in the details and venture investing is no exception. A proper term sheet should include valuation, investment and investor breakdown, form of investment, protective rights, and preferences. Below are definitions of some of the most common rights VCs negotiate. The following rights can be negotiated for Preferred Shares. For an easy to follow, bite-sized breakdown, watch this 3-part video series on Conquering the Term Sheet.

Pre-money valuation: The valuation of a company prior to an investment. (Read more)

Post-Money valuation (fully diluted): The valuation of a company at the close of a financing, which includes the new cash, the conversion of outstanding convertible securities, and creation or increase of unallocated ESOP (employee stock option plan).

Preemptive rights: These right gives existing shareholders priority to invest money in subsequent funding rounds in order to maintain their ownership stake. (Read more)

Anti-dilution: Generally structured as broad-based weighted average or full-ratchet, this right protects investor’s ownership from dilution when new shares are issued during a follow-on round of financing. With full-ratchet, in a down round, the conversion price is set to be equal to the share valuation at the current down round (note that full ratchet is VERY aggressive against the founders/initial investors – and very uncommon as a result). Weighted Average reduces the conversion price of previous rounds but does not set the conversion price equal to the price of the current down round. For an example of weighted average anti-dilution protection, read this article.

Liquidation preferences: Investments operate based on LIFO (last in, first out). This feature provides downside protection for investments and are structured as either participating or non-participating.

Information Rights: Allows investors access to the company’s facilities, employees, as well as the right to receive certain reports detailing the companies’ financials, budgets, revenues, expenses, and cash position. (Read more)

Equity vs. Convertible Debt

Which is better? It depends. Serious investors generally want to know the valuation of a company before they invest so they know exactly what they are paying for. Sometimes, to bridge funding rounds, investors choose a CLA (Convertible Loan Agreement) or a SAFE (Simple Agreement for Future Equity) to make an investment faster without forcing the current financing to set a valuation.

CLAs are a form of debt intended to be converted into equity, usually at a discount, and/or a capped valuation. The agreement normally includes provisions covering interest, a maturity date, and a liquidation preference.

SAFE Agreements give the investor rights to preferred stock in the next financing round where the investor can either take the equity or convert it into its cash equivalence.

Alphabet Soup: Funding Rounds Explainer

Over the past 20 years, the definition of funding rounds through capital raises in each round has fluctuated significantly. For example, seed rounds have historically been defined as rounds between $500K-2M. However, recently, startups with little more than an idea or a pitch deck have been raising radically more. With this in mind, below are guideposts for typical funding stages.

Seed: Initial funding that supports market research, and development of the startup. This includes finding the ideal consumer and supporting early employees. Historical raises range from $500K-$2M, but much larger raises have been trending in the past few years. This round generally has participation from friends, family and fools. (Learn more)

Series A: Generally understood as the proof of concept stage, where companies demonstrate a clear product/market fit, user base, and initial revenue growth. The typical company valuation at this stage is between $10-15M. Again, there have been startups recently raising massive, $100M+ rounds in certain areas of the world. (Learn more)

Series B: Series B can stand for ‘build’. In this stage, businesses are looking to scale, to get past the developmental stage, and expanding in to new market segments, and revenue streams. The typical company valuation at this stage is between $30-60M, raising an average of $25M. (Learn more)

Series C+: At this point in the company’s growth, it is trying to achieve large-scale expansion by adding a new market, international location, or even a new company through acquisition to fuel growth. The average funding amount at this stage is $50M, with a typical company valuation between $100-120M. (Learn more)

Do you have any risk-taking stories of your own to share? Leave your questions and comments below, and stay tuned for the next article in the series.

About the Authors

Noah Pickholtz is Vice President of Investor Relations at OurCrowd and a voting member of the Investment Committee; his team manages investor communications, engagement and operations out of OurCrowd’s Jerusalem headquarters.

McKinley Hall is a startup enthusiast with experience consulting with startups and non-profits in the US, Israel, Europe, and LATAM; she is completing her studies in International Business at George Washington University.

This is a guest post by Joel Tsafrirfeaturing an interview with Yigal Unna, Director General the Israeli National Cyber Directorate (INCD).

As early as 2002, before the cyber hype began, the Israeli government already defined the issue of information security as an essential domain for the country and placed the Israeli Security Agency (“Shin Bet”) in charge of protecting the information at the national level. Since this decision took place, no damage accrued to Israel’s critical infrastructures, even though these facilities are the target of daily cyber-attacks, and although the rate of attempts to attack them is constantly increasing at a rate of 25% per year.

Today, the overall cyber responsibility lies with Israeli National Cyber Directorate (INCD), which integrates together two government agencies used to operated separately in the areas of cyber protection and the construction of technological power.

We sat down with INCD’s Director General Yigal Unna to learn more about the ‘triple mission’ of the organization.

Coordinate the national effort

“The INCD, which operates directly under the Prime Minister, is a security-operative, non-secretive body that is designed to verify – through various tools and means – that the Israeli civilian cyber space is fully protected,” says Unna.

“I underscore our responsibility for the civilian cyber space because the army dominates the military cyber sector,” adds Una. “In the civilian sphere, we operate as overall authority, working closely with all the other operational players, including the army, which has a fairly common interface with the civilian sector, especially with regard to protecting the home front during wartime. Other players are the Israeli Security Agency, whose responsible for the prevention of terrorist threats, including cyber-terrorism, and the Police, which is responsible for the criminal side.

“The goal is to make sure that the national effort in the field of cyber protection is synchronized; that nothing falls through the cracks; and that everything that needs to happen on the national level will indeed happen: that there will be no shortage of means, tools and resources – including human capital – for the various systems and that the budgets will be allocated to meet the various needs.”

To ensure Israel’s continued leadership

According to Unna, alongside the mission to ensure that the civilian cyber space is protected, the INCD works simultaneously to ensure that the Israeli digital space will serve as enabling force. Meaning that the vital flow of information between the systems continues uninterrupted and that the digital capabilities will continue to ensure Israel’s economic, social, educational and security development.

An additional, third, objective of INCD is to continue and strengthen Israeli technological development in cyberspace and to ensure that Israel is a global cyber power: “We are working to ensure Israel’s continued leadership in the global cyber arena in the technological, organizational and security aspects,” emphasizes Unna. “This means both nurturing Israeli human capital and cultivating the technological-security-academic ecosystem that has been created here in recent years and which underlies Israel’s relative advantage in the world.

“This is done by close cooperation between all the relevant bodies within Israel and external cooperation with governments and agencies around the world. For example, to encourage academic research and development, we are partners in financing six of the cyber excellence centers established in Israeli universities, each of which specializes in a different sub-field.”

Robust, Resilience and Defense

After all this, the question arises: What is Israel’s national cybersecurity strategy against the threats that lie ahead? According to Unna, this strategy rests on three layers he characterizes as: Robust, Resilience and Defense.

“The layer of Robust is similar to that of preventive medicine in the field of public health,” he explains. “This means that we are taking a proactive policy and developing security tools even before the events take place, and if we use the example of medicine, we do not wait for the disease to appear, but rather act to immunize the body so that it can deal with it in due course.

“In practical terms that means that all the relevant bodies and agencies in the economic and infrastructure sphere in the country will be equipped with clear instructions and that all essential emergency services will follow the guidelines we dictate. We have identified some 40 critical infrastructure facilities, which are core systems, and we provide them with the latest knowledge and best-practice, while ensuring that they have coping capabilities and safeguards. Those instructions are mandatory, but the government is working nowadays to include sanctions on failure to comply with regulatory obligations in the cyber area.

“As far as Resilience is concerned, we are working to ensure that once these and other systems are indeed damaged, they will be able to recover quickly and continue functioning, after they have discovered the threats and acted to minimize the risks”, adds Unna. “This reference is to all levels of civilian activity and not only to national security systems.

“In the context of Defense, we do not act directly and the treatment is mainly in the hands of various bodies involved in thwarting and neutralizing attackers.”

In the context of the civilian cyber space, Unna also mentions the work of the national CERT, manned 24/7 by expert analysts in cyber defense, providing an initial response to the handling of cyber-attacks. Next to CERT, there is a social network where reports of security events flow, and it provides its members with a target and direction to address them.

Operating a unique model

“The final quality of any national cyber-security effort is, after all, the sum of all country’s resources: human capital, the knowledge, the capabilities, the insights and the technologies developed, and we are working on developing and empowering each of these components,” concludes Unna. “In order to realize this, we are operating a unique model relies on a network of collaborations, both on the security and civil levels, with synergy between them.

“The national cyber network will increase its capabilities in the foreseeable future in order to implement its mandate to protect the civilian cyber space, while advancing national capabilities in the field and improving the ways of coping with the current and future challenges in cyberspace, as well as promoting Israel’s leadership as a hub for developing knowledge and cyber technologies.”

Join the International Homeland Security & Cyber Conference

Get a front row view of today’s technology pushing the future of cybersecurity. OurCrowd is pleased to partner with the Israel HLS & Cyber 5th International Conference & Exhibition, to be held on November 12-15, 2018, in Tel Aviv, Israel, focusing on the challenges, threats and solutions in Homeland Security and Cyber in the areas of: cybercrime, aerospace and critical infrastructures, finance, intelligence, terrorism, and in the field of homeland security.

Alongside the conference, a professional exhibition will be presented, in which 160 Israeli companies will display their innovative technologies.

All filing and data entry jokes aside, the student internship should be an incredible discovery process; when done right, students return to campus or head towards graduation with a lot more tangible experience in their expected field and are able to relate to the expectations of the professional world they’ll enter soon. Internships mean something – as long as we, the employers, take them seriously and make them meaningful.

On that note, we at OurCrowd are excited to be celebrating National Intern Day today. Started in 2017 by WayUp, the national intern ‘holiday’ encourages employers to celebrate, empower and recognize the interns that spend their time learning while fueling our workplaces. According to WayUp – a platform that empowers early career candidates to discover and be discovered by employers (and an OurCrowd portfolio company) – “interns are key contributors to organizations across the nation. It’s important that their hard work and dedication is recognized.” We couldn’t agree more.

Take 2 minutes to watch what our fabulous Summer 2018 interns have accomplished so far – with our own intern-powered documentary:

[Note: no interns were harmed in the making of this film; as you can see they have been well fed]

It’s not too late – join us, together with WayUp and the #NationalInternDay community, and celebrate your interns! Grab a banner and share your appreciation online – and of course, your own fabulous intern team.